Saturday, July 25, 2015

(The Big Disrupt) Why are Pearson selling the Financial Times when it makes money?

The decision to sell the
Financial Times seemed strange as it boggled the mind as to why Pearson would
want to sell a famous and respected British media institution it’s owned for 58
years that’s making money in an age where most media entities are bleeding
money. The only reasoning behind the FT sale that makes sense is that the
education and publishing giant is looking to focus more on its profitable
education business and slowly wind down its media publishing business which
might also explain why Pearson is also looking to let the publishers of The
Economist buy them out of their 50% stake in the magazine.

While it is jarring to see
Pearson effectively wash its hands off two famous and respected British economic
and financial magazines, Pearson have not been shy in stating its ambition to
transition from its roots as a publisher into, in its own words, a “learning
company”. In truth, the sale of FT was no surprise as the moment John Fallon
became CEO of Pearson, the company’s transition into a full fledged learning and
education company was a done deal. There was speculation even back in 2012
about who will buy the financial Times from Pearson with news media giants such
as Bloomberg, Thomas Reuters Group and Rupert Murdoch rumored to be frame of to
take the FT off Pearson’s hands.

The only real surprise is that
Nikkei ended up buying the FT. A suggestion mentioned by the guardian suggests
that the FT sale was based on the incredible circulation numbers in japan as “the
Nikkei newspaper, Japan’s equivalent of the Financial Times, sells 3m
broadsheet print copies a day – compared with 2m for the tabloid Daily Mail in
the UK and a mere 200,000 for the FT itself”[1].
While this represents a great opportunity for Financial Times, it only begs the
question why Pearson sold the Financial Times as it’s one of the few media
operations that makes money mostly from its content thanks to strong subscriber
base.

But looking at Pearson’s recent
financial performance, the real reason Pearson sold the Financial Times becomes
clear. Pearson suffers from growing net debt and a serious contraction in returns
as Pearson was making 10.3% on invested capital in 2010 but only saw a 5.6%
return in 2014. Pearson clearly didn’t see the Financial Times or the media
business in general as ripe for growth which is evident in Fallon’s blog post
as he noted:

“We are at an inflection point in global
media. The pace of disruptive change in new technology — in particular, the
explosive growth of mobile and social media — poses a direct challenge to how
the FT produces and sells its journalism. It presents the FT with a great
opportunity too — to reach more readers than ever before, in new and exciting ways”[2]

Fallon citing disruption on the
media industry as a rationale for selling the FT doesn’t make sense as the FT,
as mentioned earlier, are one of the few media companies that have weathered
the storm and even thrived in the winds of change that has changed the media landscape
over the last decade.

Nonetheless, expect Pearson to
focus on it growth markets for its education business in Brazil and China as
the North American market ( by far Pearson’s biggest) is showing signs that has
peaked and is set or either stagnation or even decline. In sum, Pearson is
looking become a learning company but flogging off the FT clearly was unnecessary
and is a sign that the company may be moving too fast.

[1][1]
The Guardian, 2015, The Guardian view on media globalization: good news for the
financial Times, http://www.theguardian.com/commentisfree/2015/jul/23/the-guardian-view-on-media-globalisation-good-news-for-the-financial-times